Why Corporation or LLC

And welcome to this module. Why C corporation or LLC? So at this point, you understand the differences between all the entity types and from a business credit perspective, I’m going to break down which one, basically either one would be sufficient, but why would you choose one of the over the other? All right. So, here’s what we are going to cover. So the first thing I’m going to get into is the C corporation or corporation and the advantages and disadvantages, a little bit more detail of these corporation types. Then the difference between the S and a C in a little bit more detail, how profits are taxed and handled with the C corporation. And also the same thing for the LLC. I spoke about it in a previous module, but I’m going to get into the nitty gritty on this particular one and then the advantages and disadvantages.

So moral of the story is if you have a corporation, whether it’s taxed as a C or S or an LLC, these structures are going to be effective for you to form your corporation with. Now, again, in my professional opinion, I’ll explain the disadvantages. The C corporation is going to have a lot less liability as a personal owner than the limited liability will. However, I’ll cover those details. It doesn’t mean you can’t build credit with it. I’m just explaining that. So let’s go in right break down. So why a corporation? So, number one, like I said, there is several ways to legally recognize a business for tax perspective and regulatory reasons. A C corporation is a simple way to structure the ownership of a business and contrast with the other problem, business structures, including limited liability and S corporations and sole proprietors.

So the number one thing is really, really simple to organize this ownership structure from a legal perspective. Also, it’s a better structure when it comes for larger businesses, especially when you’re trying to build a business credit. So again, one of the things I’ve been speaking about, and I’m going to continue to speak about it is the appearance. So the larger corporation appears to be, the simpler it is for us to get funding, right? So what we want to do is put out there and project that we are a large corporation, and then if you have the intention of wanting to get investors, it makes it very easy. If you want to get investors for them to purchase shares of stock in your actual corporation or view the issue here, or stocks as another way to raise funds.

And if you intend on it being bought out or becoming a publicly traded company, you can do an IPO and they C corporation is more attractive to potential investors, venture capitalists, and other shareholders, because it allows wider ownership of the corporation. Not to mention, if you want to get foreign investors or other entities like trust, and I’m getting into some high level stuff, it’s easier for them to want to invest in an actual corporation than it would in LLC because of the structure and the nature of the corporation. Now, the majority of large businesses in the United States are structured as a C corporation. And although a C corporation could theoretically consists of just one person, the information below will help you decide if that structure is right for you. Now, number one, the number one thing is it limits liability as a shareholder in most cases for any debts of the businesses assuming you’re not a personal guarantee. Now, one of the things you’re may end up having to do initially is become a personal guarantee of that debt. However, once you have established a corporate credit file and it’s, and it’s beefed up enough, you can remove yourself from being a personal guarantee on those lines of credit. And then now the C corporation is solely responsible for that debt separate from you. And all personal guarantee means is that if something happens, worst case scenario in the corporation’s assets are not sufficient to take care of the debt, then they can come after you personally. However, in most scenarios, a C corporation should be able to protect you. And what we want to do is structure the corporation in a way to where we can remove ourselves as personal guarantors. The other thing is that it can continue to operate into, into perpetuity, meaning it’s going to operate forever.

So like I was saying before many corporations I’ve been in like the United States corporation, is that again, many people don’t even understand that this is a corporation, it’s a corporation, the United States corporation. So it can continue to operate many of your schools and universities, depending upon how they’re set up, may be set up as corporations or trust. And again, I don’t want to make this a history lesson, but essentially your corporation can continue to operate one when you’re long and gone. And that’s really kind of how you start building up that generational cashflow, and generational wealth. Now, and the other thing is advantages of a corporation is limited liability. Like, again, I cannot stress this enough. There’s limited liability because as a shareholder, you’re just a shareholder, even though you’re the 100% owner shareholder, you can limit liability, especially if you can transfer over, move yourself as a personal guarantee.

In many cases, you’ll be able to get access to corporate credit without having a personal guarantee, but in some scenarios with new cars and larger lines of credit and even business funding, you are going to have to personally guarantee in some scenarios. And when that happens, you can still have limited liability, but you can remove yourself as PG and then it exists independently outside of its owner. So again, that’s another key thing the corporation exists with, or without an owner or with you being an owner. You so you can have other owners and it still exists and still can continue to operate, especially have a really good management team in place. That thing can keep on pushing on. Another thing is easy access to funding through issuing.

I’m gonna go ahead and that’s gonna drive me crazy if I don’t change that right now, issuing stock. Okay, there we go. So you can get funding through issuing stock and then also ownership of a corporation can be fluid and transferred. So it was very simple to transfer your ownership via the stock percentages that you have in a company, and then enhance business credibility or corporate credibility. Because again, the majority of companies are corporations and then those corporations really can exist without you. And that’s really the American way. So that’s why Dun and Bradstreet and Experian business they kind of favor C corporations because they understand that this makes up 60% of all the companies in America, and you can be a corporation and they understand how that stuff works. Now, few disadvantages so, you know. Now, there’s different tax structure than any other types of business.

So the corporation does have its own tax structure. The company does have to pay tax. And when you’re a C corporation, and generally speaking, like I was saying before, this double taxation for investors when dividends are paid to them. However, one key thing that separates the C corporation from the S corporation is you don’t have to pay out dividends, right? So you can still just be taxed on profit and not necessarily pay tax on dividends. Another thing is you can carry over losses to reduce future profit as well. So although there’s double taxation, there’s a lot of nimbleness when you understand this. And when you’re working with a really competent tax planner or a CPA or tax advisor, a financial planner who understands the power of these things. So, that is a potential downfall, but I was just explaining how that could be turned into pros, the legal rules, regulations, and formalities and complaints you have to meet.

I won’t lie. This is a disadvantage because you do have to keep those annual records every year to make sure you’re doing everything to keep your corporation structure correct. Now, other than that, these are the disadvantages. And when it comes to how taxes are taxed, like I’m saying before, the corporation is going to have his own tax return and you don’t pay tax on revenue, you pay tax on profit. And when you file the tax return, you’re going to have to file an 1120 and it has a separate business entity. So unlike individual C corporations are designed to have their own tax form with the IRS and C corporation has their own tax rates. Now, depending upon how the tax law changes, the tax rate for a C corporation is a flat tax rate, which I’ll cover on the next slide, which in some scenarios, when you start really making, you know, over a million, I would say over half a million, a million dollars in profit, you really, really want to take a look at that particular thing. Because again, we’re not starting this businesses to get money. We’re starting this business to create wealth for ourselves and our families, right? And then corporations, like I was just saying in the previous point is they can retain their profits and earnings as a part of their operating capital. And that can show to them from some profits on taxation. So again, we only have to pay taxes on the profit, but we can reinvest that and keep it inside of the company without paying out to our shareholders even if we are the only shareholder or we happen to have shareholders of other entities that we own and control, or we happen to have other investors who are part of this. So the C corporation really, really makes it to where you can create like a wealth generating machine for sure and then reduce tax as much as possible.

So, like I was saying before, when you look at this particular slide, I’ve already kind of told you guys not to do the proprietorship, but it says 2018, but these tax rates are essentially the same for 2021 as well. They could be changing in 2022 because of the new administration that we have in office, but essentially the tax rate for a pass through entity. And let me be clear, a pass through entity can be you as an individual or sole proprietorship, a partnership and LLC, which I’ll cover next. An S corporation and the C corporation does not pass through its profits, the C corporation has its own tax rate. So that’s why you’ll see that if you are any of those three entities prior, your tax rate can be as low as 10% as high as 37% versus the corporation that has a flat tax rate of 21%.

Okay. So,that’s why the first three is saying that they’re not subject to double tax, but you still have a higher, effective tax rate. And then there is FICA taxes on profits as a sole proprietorship and a partnership, but there’s no FICA taxes on a S corporation, there is no FICA taxes on a C corporation. Now, the costs of set up admin management is a little bit higher for the corporations and then the liability protection. So there is no liability protection for you as an individual or sole proprietorship, generally, no liability protection as a partnership, which is why I’m just saying you want to be either an LLC or an S corporation. So, when you become an LLC, you have that limited liability. However, it’s really gonna stop at that $250,000 mark, especially if you want to dissolve that corporation, you still have to, you really can’t dissolve it unless those debts are handled.

So when it looks at the corporation or the C corporation, that’s like one of the things you want to consider right now going into a few other things, the difference between S and a C, I was just really just breaking it down is how they’re taxed. And that’s really it. So the S corporation to be clear, its profits are going to flow through to you as an individual shareholder, 100% owner on your personal tax return. And when it’s a C corporation, the corporation has to pay tax and then you pay taxes, as individual shareholder, but you don’t necessarily have to pay that tax or take that distribution as a shareholder, if you don’t want to. Now, when we look at, as we start transitioning into how the differences between LLCs can be taxed, the unique thing about an LLC, and I’ll get into the other advantages.

So the thing with the LLC is the LLC is a legal entity of itself. So that’s the biggest thing, but the IRS does not recognize the LLC for tax perspective, does not recognize or tax the LLC itself. You have to choose how you want to be taxed as an LLC. So for example, the LLC can be taxed as a C corporation. The LLC can be taxed as an S corporation. The LLC can be taxed as a partnership. And for the majority of people who form LLCs, it’s tax as a proprietorship and/or individual, and it just flows through to your personal tax return. So that’s the thing about the tax, you have that unique advantage. So when we look at some of the advantages, the entity is not recognized by the IRS for paying taxes so the business itself doesn’t have to pay tax.

However, you still going to have to choose how you want to be taxed like I was the same previously, like you have to choose. Now, the other thing is, is that there’s less rules, regulations and formalities and compliance you have to meet than you would if you were a corporation, there’s flexibility when choosing the tax structure and profits and distribution. So you can have that flexibility around how you want to be taxed. So even if your company is brand new and it’s not showing that many profits, as of yet, you want to work with your tax advisor to figure out, okay, which which way should we be taxed, right? How do we avoid tax? And then the other thing is it can separate you from your business, which is a big thing, but, and, and you have limited liability, up to that $250,000 mark.

So generally speaking a little bit more, but that liability, if you want to dissolve that corporation, you’re going to have it up to that 250 mark. Now, the disadvantages, generally there’s unlimited liability over $250,000. So again, depending upon that state, there could be unlimited liability, especially if you’re viewed as a single member, LLC, which the majority of people will be viewed as a single member LLC in the corporate veil could be potentially pierced, and then it can come after your personal assets. So that’s why, and again, structure, structure, structure is really important and that’s why I say what I said before. Meaning like, if you have a corporation, you would almost want your corporation to own your LLC and you don’t individually own your LLC not to get into the weeds of it, but I just want you to understand it. Now, guys, I’m giving you this sauce in this these details, but I’m not trying to favor one over the other, or sway you. I’m giving you the information. So you can make an informed decision about what you feel is best based off your situation. So if you choose to form an LLC, which there’s nothing wrong with that, and if you choose to operate as an LLC and build up credit, you can do that. Right. But what I am also saying is, once you make your decision on which one you want to do, that’s perfectly fine. The goal is to still be able to build up corporate credit. That being said, don’t send us an email or reach out to us, and should we do an LLC or corporation? I’m breaking it down right now. So that way you can make an informed decision about which one you want to do.

But that’s why I say what I said before if I were it, I’m not telling you what to do here, but if it were me and I was forming an LLC, I would already have a corporation that owned the LLC. And I wouldn’t personally own an LLC. I just wouldn’t do it. Now, generally it cannot exist without its owners. Generally speaking, the LLC is not going to continue to operate into perpetuity unless it has a really strong management group or it’s owned by another corporation. But generally speaking, the entities not going to own without, its owners. Generally it’s not favorable outside for outside or foreign investors. So if you have an LLC foreign investors or trust, aren’t going to be able to just fund and get those benefits to invest in your LLC the same way it would, if it was a C corporation, assuming you were looking to get investors.

Okay. So these are some disadvantages. And like I was explaining before, this is the biggest thing that you want to understand about LLC is that it’s its own legal entity, but you can choose how it’s taxed, right? And that’s really it. So either entity is going to be fine for you to operate under, my preference is if you don’t already have a C corporation or corporation, just from a structure perspective, is get the C corporation. And then if you already have an LLC transfer the ownership from that LLC, from your person to your newly formed incorporation, okay. Now, if you already have an incorporation, just make sure that your Inc is structured and you update the secretary of the state with the correct commercial address and the contact information on that particular company. And you’re good to go.

If you don’t have either one and you’re trying to decide which one should you do, it’s really going to be boiled down to, are you going to do the necessary steps to handle it from a regulatory compliance perspective or not? Okay. And again, if you already have a tax professional or a tax advisor, they’re more intimately involved with your tax situation than I am so that can make that recommendation in terms of which one you should form, right? With all things being equal. You also have to consider, am I going to make this a lifestyle business, meaning I’m just going to make less than a half, a million dollars, or am I planning on making over seven figures and really getting investors and really growing this thing. So these are all considerations to do, and take into account. But the moral of the story is make a decision on which one you want to do. And then in the very next module, I’m going to show you how to form either one of them.